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Euro wealth managers must change in response to consolidation and generational wealth transfer

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A report by JP Morgan Asset Management and Oliver Wyman outlines changes reshaping the European wealth management industry and identifies factors that will separate winners and losers.

“The future of European wealth management: Imperatives for Success,” which is based on in person interviews with CEOs and senior executives from 23 wealth managers across Europe, as well as an online survey of an additional 136 industry professionals, finds that ninety per cent of European wealth management senior executives expect consolidation at a time when half of all European wealth is expected to change hands.  
 
With EUR18 trillion in financial assets, Europe remains one of the largest wealth management markets in the world, growing faster than European nominal GDP since 2010 (4.3 per cent compound annual growth rate). Whilst the industry contends with major challenges from increasing competition, limited profitability and changing client behaviour, capital markets still expect wealth management executives to deliver significant earnings and asset growth going forward.
 
To succeed, wealth managers will have to meet some formidable challenges:

  • The vast majority of wealth managers anticipate structural change, as shown in the chart below, with 85 per cent expecting that larger players will acquire smaller players and 73 per cent expecting some form of consolidation
  • The next generation of clients is emerging as wealth is created in new industries and a peak transition of wealth to a younger generation occurs over the next 20-30 years
  • Digital innovation will provide opportunities to better engage and service clients, but will also enable innovative players to disrupt the market
  • A regulatory focus on client protection and stability of the financial system is creating numerous challenges for wealth managers, but is also opening up opportunities for differentiation
  • Demand for full tax transparency (in response to OECD rules and automatic data exchange, for example) is transforming the offshore banking model

“With the unprecedented industry change underway, the traditional wealth manager proposition is coming under strain. A clear understanding of the forces at play, a focused strategy and efficient execution will separate the future winners from the losers,” says Stefan Jaecklin, Partner and Head of the Wealth and Asset Management Practice, Oliver Wyman.
 
Based on their research, J.P. Morgan Asset Management and Oliver Wyman identified four main strategic imperatives that will characterise successful wealth managers;
 
1. Incumbents must learn from technology-based wealth managers and other non-bank competitors how they can improve their own digital offerings.
 
“It is certainly a fact that technological disruption and new business models are now also affecting the wealth management industry – these new players offer a strong value proposition with full transparency and are therefore winning many new clients,” says Claude Kurzo, Head of EMEA Strategy and Business Development, JP Morgan Asset Management.
 
“However, traditional wealth managers should actually embrace technological disruption – they should incorporate the benefits of ease of access, transparency, and automation into their models.  The winners will be firms that successfully marry technological advances with the hallmarks of traditional wealth managers – stability, breadth of offering, and most importantly dedicated in-person advice.”
 
2. Front line productivity and operational efficiency need to be further increased to address industry-wide cost increases and declining revenue yields.
 
“Productivity and efficiency will be critical in order to achieve the 9 per cent assets under management and 7 per cent revenue growth wealth managers are forecasting,” says Jaecklin.
 
“Wealth managers will add a significant number of expensive frontline staff to achieve this growth. To protect their bottom line, they will need to leverage technology and automation to cut down on operating costs and ensure that their frontline staff remained focused on attracting and servicing clients.”

3. Wealth managers must rethink client engagement models to enable better client service. Discretionary, advisory and execution-only mandates need to become more transparent for clients and more efficient and automated for wealth managers. Advice and outcome-oriented portfolio construction for clients – the core of a wealth management proposition – needs to be further emphasised and strengthened.
 
4. Deeper and closer relationships between wealth managers and asset managers will need to be formed to deliver stronger investment propositions and solutions.
 
“Given all that is on their plates right now, wealth managers should look to work closely with select asset managers to develop tailored client resources and to enhance investment ideas, in order to ensure the client is receiving the best possible advice. Some wealth managers have already started that journey and leveraged asset managers beyond products, e.g. for capital markets and product expertise, joint product development and insights into outcome-oriented portfolio construction,” says Kurzo.

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